Market practices ‘back to basics’ after Lehman collapse, says study

LONDON – One year after Lehman Brothers fell into bankruptcy protection, a report by law firm Allen & Overy suggests market practices remain cautious, focusing on risk analysis, and legal and counterparty risks.

The study of the law firm’s partners across 20 countries highlights a tightening of legal covenants in lending documentation, a “firming up” of legal risk management standards by banks and regulators alike, increased counterparty risk emphasis within capital markets, and within restructurings a rise in disputes and increased use of pre-tacks and debt-for-equity conversions.

The report concludes that, in essence, participants are negotiating harder and with greater due diligence put into managing and assessing risks in what is still an uncertain market environment.

As regulators and politicians continue to debate responses to the crisis and the direction of financial reform, the study makes the claim that the industry has already reformed its practices, taking a far more conservative approach to business – which has also reduced in volume.

“Legal risk management by banks in relation to their dealings with counterparties in the market and by their regulators has intensified, as one would expect,” says Allen & Overy special global counsel Philip Wood, who compiled the report.

“Our report indicates that, in addition to higher pricing and reduced leverage, there has been a significant tightening up of the terms of legal documents. But recent events have not resulted in a revolution in the coverage of the documents for syndicated credits or bond issues, or a fundamental reappraisal of non-financial terms,” he says.

The study says that, although the reasons for securitisations remain unchanged, the greater scrutiny of counterparty risk is a response to an increase in investor or counterparty legislation – led by claims in response to the Madoff fraud investigation and the alleged mis-selling of Lehman-related structured products.

This is mirrored, the report says, by a greater threat of regulatory enforcement within an overwhelming majority of jurisdictions, with trends towards more intrusive supervision, data requests, more frequent regulatory visits and tougher penalties.


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